Direct marketers face their share of challenges these days. Traditional prospecting is less effective than ever before. Not only is there a limited universe of new names, but regulatory issues and the mandate to do more with less make targeting the right prospects difficult at best. What’s more, consumers across the board are simply inundated with offers of all kinds, often to the point of inertia.
Traditional segmentation techniques used by marketers in all industries include incorporating age, household income, home value and other demographics into segmentation models. And we know that recency-frequency-monetary (RFM) segmentation that is based upon past purchase behaviors also is widely used. The problem is that many of these techniques either have been fully exploited or just are not reliable indicators of a person’s capacity to spend and do not let marketers truly qualify consumers.
According to the 2005 DMA Statistical Fact Book, only 37 percent of companies rated household-level targeting models as “very effective.”
Even the best marketing model falls short when it relies only on income, geography and other quantitative information. To make the most of their budgets, marketers must look to information that provides a deeper understanding of consumer needs, wants, propensities and ability to purchase.
Are marketers getting their piece of the consumer-spending pie using traditional segmentation systems? Probably not. Today’s technology offers much more. The solution? Focus on discretionary income.
Marketers have a new way to identify and target potential customers. The starting point is to understand an individual consumer’s capacity to spend, a reliable and important indicator of the likelihood to buy. Capacity to spend depends on discretionary income.
Discretionary income consists of the funds remaining after consumers take care of essentials such as food, clothing and shelter. As Abraham Maslow, the psychologist who created Maslow’s Hierarchy of Needs, suggests, it is only after those needs are met that people consider how to use their remaining discretionary dollars based on their interests and their lifestyles.
Measures of typical gross household income tend to be unreliable and do not target consumers effectively. Marketers instead must focus on assets and discretionary income, not simply gross household income. The shift in focus must be toward the dollars that are left after income comes in and money spent on basics and essentials goes out. Without an understanding of a prospect’s ability to purchase, no amount of persuasive copy, award-winning graphics or hard-to-beat offers will yield results.
There are tools that can be used to segment, prioritize and target current and prospective customers based on their true ability to buy, viewing wealth based in part on liquid asset factors, not just income. The objective is to rank consumers based on spending power and combine it with propensity data.
To understand why this is important, consider two households with the same income, say $150,000, and that are in the same life stage. These two households have substantially different spending power and patterns depending on their tastes, attitudes, where they live and their financial asset base. If one’s dominant asset is their home, for instance, then that household is less likely to make a major purchase than the household whose dominant assets are liquid. These are the factors that determine what each consumer can afford to buy and on what products and services consumers choose to spend their money.
The key is to identify, segment, target and communicate with those households that are most likely to have the ability to buy – and to determine those households with limited spending ability. This lets direct marketers better allocate precious resources and target those consumers who are truly worthwhile prospects.
With such a segmentation approach, marketers can:
• Precisely target prospects with the ability to buy a particular product or service.
• Rank current customers based on purchase capacity.
• Enhance customer profiles by combining spending power with transactional history.
• Customize offers and marketing messages based on the purchase capacity of each audience segment.
• Identify valuable new prospects.
• Avoid contacting prospects with low or no purchase capacity, thereby decreasing marketing costs while increasing average purchase amounts.
All marketers, regardless of industry, can benefit from a focus on discretionary spending. It starts with acquiring and applying actionable information that can help reveal those prospects and customers who have not only the interest to buy, but also the discretionary funds to make the purchase.